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Brighter U.S. economy makes Fed tapering more likely

WASHINGTON (AP) – The economy is showing strength as summer nears a close – a trend that’s raising the likelihood that the Federal Reserve will slow its bond buying later this month.

The steady improvement is also lifting hopes for Friday’s report on job growth last month. The August gain is expected to nearly match the year’s monthly average of 192,000 jobs.

On Thursday, reports showed that services companies are stepping up hiring and that a dwindling number of people are losing jobs. Those figures follow reports of stronger auto sales and faster expansion by U.S. factories.

This year’s solid job growth, along with a sharp drop in layoffs, has helped lower the unemployment rate to 7.4 percent from 7.9 percent in January. It also means more Americans are earning paychecks and will likely boost consumer spending in coming months.

Analysts predict that employers added 177,000 jobs in August.

“People are finding work, and they have more money to spend,” said Drew Matus, an economist at UBS.

The improved jobs picture is a key reason most economists expect the Fed to announce later this month that it will scale back its bond buying. The Fed’s $85 billion a month in Treasury and mortgage bond purchases have helped keep home loan and other borrowing rates ultra-low to encourage consumers and businesses to borrow and spend more.

Chairman Ben Bernanke has said the Fed could begin slowing its bond purchases by year’s end if the economy continued to strengthen and end the purchases by mid-2014. At its policy meeting Sept. 17-18, the Fed will debate whether to taper its monthly purchases and, if so, by how much.

Key data released in the past week have bolstered the position of those Fed officials who argue that the economy is healthy enough to withstand tapering:

— U.S. services firms, which employ about 90 percent of the U.S. workforce, expanded last month at their fastest pace in nearly 8 years, according to a report Thursday from the Institute for Supply Management. Sales and new orders rose. Service companies also hired at the fastest pace in six months. The institute’s index of service sector growth has jumped 5.8 points in the past two months to 58.6 — the biggest two-month increase since it began in 1997. Service firms include retailers, banks, construction companies and hotels.

— A four-week average of applications for U.S. unemployment benefits has fallen in the past month to its lowest point since October 2007 — two months before the Great Recession officially began. The trend shows that employers are laying off fewer and fewer workers.

— Survey results reported Thursday by payroll provider ADP found that American businesses added 176,000 jobs in August. That was just below the 198,000 added in July but close to the past year’s average monthly gain.

— U.S. factories grew last month at their strongest pace in more than two years, according to the ISM’s index of manufacturing growth. A measure of orders soared to its highest level since April 2011, a sign that factory output could grow further in coming months.

— Americans bought new cars in August at the fastest annual pace since November 2007, before the recession. Auto sales jumped 17 percent compared with a year earlier. Toyota, Ford, Nissan, Honda, Chrysler and General Motors all posted double-digit gains over last August.

Still, more than four years after the recession officially ended, the economy has a long way to go return to full health. The unemployment rate is well above the 5 percent to 6 percent range associated with a normal economy.

In addition, most of the growth in the number of people working is due to fewer layoffs rather than strong hiring. Many employers remain reluctant to fill jobs.

Job growth measures the number of people hired minus the number who lose or quit jobs. When companies are laying off few, it doesn’t take many hires to create solid growth in the number working.

Also, many of the jobs created this year have been part-time positions in industries with generally low pay, such as hotels, retailers and restaurants. Such jobs leave consumers with less money to spend than do better-paying positions in industries such as manufacturing and construction, which have mostly shed jobs the past four months.

Businesses have also reduced spending on heavy machinery and other long-lasting factory goods. That caused orders to U.S. factories to fall in July by the most in four months, the Commerce Department said Thursday.

And last month, Americans spent cautiously, according to sales figures released Thursday by many chain retail stores. Revenue at stores opened at least a year rose 3.7 percent, according to a preliminary tally by the International Council of Shopping Centers. That was below the 6 percent gain in August last year.

The figures bolster evidence that a shift in consumer spending toward autos, real estate and home improvement is leaving less room for nonessential items like clothing.

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AP Retail Writer Anne D’Innocenzio contributed to this report from New York.